Those in the industry know that excessive manufacturer subvention of new vehicle prices was one of the most corrosive factors affecting used vehicle prices for the majority of the last decade.
This was particularly true for domestic OEMs as they pushed production to compensate for legacy obligations. The immense sums of cash spent on incentives and non-product development-related expenses meant that domestic models ultimately brought to market were at times at a competitive disadvantage to their import counterparts; this of course meant that additional subvention was necessary to encourage a retail purchase.
Bankruptcy, reorganization, and recession helped to change this cycle however. Production today is more in line with demand and the quality and desirability of new product has improved dramatically over the past few years. I've been in this industry for a long time now, and the depth and breadth of product for each manufacturer has never been better. It’s not even close.
This correction brought about by trial has allowed manufacturers to consistently pull back on incentive spending.
Per Autodata, since the end of the recession in 2009 the average amount spent per unit has fallen by some $300, or 10%. Multiply that by the number of units produced each year and the savings quickly add up. In large part, these savings go right back into making better product. This allows new vehicle prices to increase and associated downward pressure on used prices is minimized.
So the market has progressively moved from a negative circular process to one that is decidedly more positive and this change in course has been one of the more pronounced drivers behind the rise in used vehicle prices over the past few years.
Incentive spending year-to-date combined with known production plans suggest that we’ll continue to go down this positive path over the near-term.
So far, overall spending per unit is down by a slight 0.4% from last year’s level. Doesn't sound like much, but considering that OEM spending retreated significantly last year due to natural disaster-oriented production issues puts this figure into clearer context.
A closer look at spending across the various incentive types shows that consumer cash – which is the most detrimental to used vehicle prices – and subvented financing are flat and down, respectively, while lease subvention has grown.
The fall in financing isn't surprising considering the how low rates are to begin with. The smaller difference in spread between OEM cost and the reduced APR offered will naturally lead to lower amounts spent on this type overall. In fact, it’s really this drop that is helping to pull incentive spending down overall.
In terms of leases, manufacturers seem increasingly willing to add onto the future residual amount in order to reduce monthly lease payments (and thus make lease payments more attractive). Not surprisingly, we’re seeing this more in the luxury sector than on the mainstream side. This could prove problematic to OEMs should actual used values be less at lease end than expected, but the additional lease volume is helping to alleviate the scarcity of late model used supply (NADA estimates that off-lease supply for units up to five years in age is actually set to start growing again).
As a collective, manufacturers need to continue to pull back on average incentive spending and control production in order to maintain higher values on the used vehicle side.